The highly anticipated June-quarter Consumer Price Index (CPI) delivered headline inflation in line with expectations at 1.0%.
This was unchanged from the 1.0% increase in the March quarter. The print takes annual headline inflation in the year to June to 3.8%, marginally increasing from 3.6% in the year to March.
It is important to note that the RBA’s preferred ‘trimmed mean’ measure came in at 0.8% for the June quarter and also modestly lower in annual terms at 3.9% (from 4%). This was a touch below market expectations, which cheered both interest rate and equity markets. Indeed, interest rate market pricing moved fairly dramatically, with the pre-CPI 20% probability of an August hike dropping to zero, and the 8% probability of a cut by December rising to 70%.
This shift in near-term rate pricing looks optimistic to us. We agree that the next move in rates is almost certainly down, but we see the first half of 2025 as a more likely starting point at this stage.
While better than feared, the core CPI was in line with the RBA’s quarterly forecast, and slightly ahead of the RBA on a year-on-year basis (the RBA’s forecast stands at 3.8%). The RBA will likely reiterate next week that it “considered” a hike at the August meeting. However, there now seems little chance of a 25bps rate hike in August, given: 1) the trimmed mean settled back to 'only' 0.8% q/q, and 2) headline CPI was not above the RBA's existing forecasts. The RBA will likely retain the view that inflation can return to the mid-point of its target by mid-2026. This reinforces the likelihood that the RBA will not hike rates at its August meeting.
That said, a degree of residual hawkishness around the upside risks will remain given the strong rate of domestically generated inflation, notably non-tradables categories running at 5.0% y/y. This is partly offset by weak tradables categories, where prices increased 1.5% y/y. Similarly, annual inflation in the labour-intensive services sector increased by 4.5% in June, up from 4.3% in March, as consumers continued to experience higher prices for a range of everyday services.
Inflation Still Broad-Based
The inflation pulse remains broad-based, with ongoing strength across a range of important sectors including: 1) Education (0.2% q/q, 5.6% y/y; 2) Health (1.5% q/q, 5.7% y/y) 3) Housing (1.1% q/q, 5.2% y/y), especially rents (7.3% y/y); & 4) and Food (1.2% q/q, & 3.3% y/y).
While inflation pressures are relatively broad, the largest contributor to the overall price increase over the past year continues to be housing, as tight rental markets continued to drive growth in rental costs. Although price growth in rents edged lower to 7.3% in the year off the back of changes to the Commonwealth Rent Assistance in March and September, it remained close to its fastest rate since 2009. This is due to a lack of home building, as well as strong demand driving rental vacancy rates to record lows.
| Sectors | Sector Weight | Mar Qtr 2024 to Jun Qtr 2024 Qrt % change |
Jun Qtr 2023 to Jun Qtr 2024 Year on Year % change |
| Food and non-alcoholic beverages | 17.2 | 1.2 | 3.3 |
| Alcohol and tobacco | 7.9 | 1.5 | 6.8 |
| Clothing and footwear | 3.4 | 3.1 | 2.9 |
| Housing | 22.2 | 1.1 | 5.2 |
| Furnishings, household equipment and services | 8.9 | 0.8 | -1.1 |
| Health | 6.3 | 1.5 | 5.7 |
| Transport | 11 | 0.9 | 4.6 |
| Communication | 2.3 | -0.8 | 1.4 |
| Recreation and culture | 10.8 | 0.5 | 0.9 |
| Education | 4.4 | 0.2 | 5.6 |
| Insurance and financial services | 5.6 | 1.2 | 6.4 |
| All groups CPI, seasonally adjusted | 100 | 1.0 | 3.8 |
| Trimmed mean | 0.8 | 3.9 |
Source: Australian Bureau of Statistics, Consumer Price Index, Australia June Quarter 2024.
Further Rate Rises Not the Answer to Australia’s Inflation Problem
The June quarter figures show quite starkly that much of the significant price rises in goods and services over the quarter have been driven by supply-side factors, including poor weather (insurance, food) and housing shortages, which are largely unaffected by interest rate rises.
Higher rates only fight inflation via their impact on the demand side, by subduing spending. The RBA’s dilemma is that Australia’s economy is already relatively weak, with investment and consumption currently growing at a below-trend pace. From this perspective, the high but marginally lower June quarter trimmed mean inflation result is likely to provide a tentative degree of comfort for the RBA that current rates are sufficient to return price growth back within the target band over the medium term. As such, we do not expect the Reserve Bank to hike rates in August, but expect the RBA to remain on hold into 2025.
Inflation Is Slowing, but Not at a Fast Pace
Advocates for an RBA easing later this calendar year will focus on the trimmed mean rising 'only' 0.8% q/q. However, the y/y inflation rate is still only ticking down very gradually to 3.9% y/y. Six months ago it was 4.1%, so progress on inflation reduction has slowed recently.
Inflation remains high, and well above the RBA's target mid-point of 2.5% y/y. Moreover, this stickiness of inflation continues despite government policies which technically lowered headline CPI over the last year by between 0.50% and 0.75% pts y/y.
This highlights Australia’s somewhat unique inflation problem. The global trend is now clearly one of moderating inflation, leading to other central banks moving to cut rates. Australia's moderation remains sluggish and unconvincing, despite weak real GDP growth. This suggests a higher-for-longer rate profile for Australia relative to other developed economies.
As a result, while markets no longer expect the RBA to hike, the RBA will likely stick to a “hawkishly dovish” strategy, by keeping rates at current levels for some time, being reluctant to cut and reluctant to hike. This strategy would explicitly aim at a soft landing for GDP and the labour market, while giving inflation time to edge back toward the target band over several quarters.
Market Implications – Too Much Too Soon?
The aggressive shift in the front end of the curve and associated equity market exuberance may be a bit overdone, as the reality of Australia's sticky inflation but soft growth backdrop reasserts itself. The next move in local rates now looks almost certainly to be down, albeit not until sometime in the first half of next year.
The US macro backdrop of moderating inflation and Feds cuts (likely beginning in September) is supportive for local rates (lower) and equity markets (higher). We see long-term bond yields lower and equities moderately higher in six to 12 months. However the market’s recent dovish shift suggests relatively incremental and choppy gains from here.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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